The Committee on Oversight and Reform is investigating the latest scandal involving Tom Perez, who is reported to be President Obama’s choice for Secretary of Labor. Committee Chairaman Darrel Issa has confronted the Department of Justice (where Perez now serves as Assistant Attorney General) with charges that Perez arranged a quid pro quo for the City of St. Paul, Minnesota to drop the Supreme Court case of Magner v. Gallagher.

In exchange for dropping its case, the U.S. agreed not to intervene in an unrelated False Claims Act case that had the potential to return over $180 million in damages to the U.S. treasury. Senate Judiciary Ranking Member Chuck Grassley, House Judiciary Committee Chairman Lamar Smith, R-Texas, and House Oversight Financial Services Subcommittee Chairman Patrick McHenry join with Issa in pressing the charge of quid pro quo.

Why did Perez and others in the Justice Department want the City of St. Paul to drop its appeal in Magner v. Gallagher? Because, as explained below, it was afraid the Supreme Court would invalidate one of the pet methods of proving racial discrimination in housing cases.

In the Magner case, slumlords sued the city to prevent the enforcement of its housing code on the grounds that the code disproportionately decreased the amount of housing available to minorities. The City argued that the Fair Housing Act of 1968 (FHA) prohibits only intentional discrimination, not neutral practices like code enforcement that happen to impact particular groups disproportionately.

The slumlord’s theory is called “disparate impact.” It originates in employment discrimination cases. There, plaintiffs are allowed to prove a prima facie case of discrimination by showing that a neutral practice, such as a test or running criminal background checks on applicants, excludes African-Americans (for example) at a significantly higher rate than it excludes others.

The employer must then justify the use of the practice. Plaintiffs seek to impose, and from liberal judges sometimes obtain, a very high burden on the employer to prove the “business necessity” of the disputed practice.

Given a high enough burden of proof, the ban on employment discrimination becomes a vehicle for virtually eliminating merit selection and, in effect, imposing quotas on employers. For if reasonable selection devices that disfavor minorities cannot clear an unreasonably high bar, employers will abandon them one by one until merit can only be taken into account to the extent it produces no differences in racial outcomes.

Disparte impact theory is firmly established, by virtue of Supreme Court jurisprudence, in employment cases (though most judges still resist the high burden of proof plaintiffs seek in evaluating the job relatedness of a challenged practice). In housing cases, such as Magner, the doctrine has enjoyed considerable success in lower courts, but the Supreme Court hasn’t decided its applicability under the FHA.

Magner was the case in which the Supreme Court was expected to do so. And many observers thought the Court was poised to hold that the FHA does not permit claims based on disparate impact.

Perez probably thought so too, or maybe he just didn’t want to take the risk. In any event, documents reviewed by the Committee on Oversight and Reform indicate that Perez, in effect, bought St. Paul’s agreement to drop its appeal of Magner in exchange for DOJ’s agreement, over the objections of career attorneys, not to join a fraud lawsuit against the City.

Score one for the slumlords and one for the “civil rights” bar.

The fraud suit that DOJ stayed out of is unrelated to Magner, although it too involves claims of race discrimination. In that case, a private whistleblower charged that St. Paul falsely certified that it was using federal funds to create jobs for low income workers of all races, when in fact (surprise, surprise) it was only focused on employing minorities.

Career DOJ attorneys characterized the City’s behavior as a “particularly egregious example” of false certifications. The Department of Housing and Urban Development concurred in the recommendation to sue, as did the U.S. Attorney’s office in Minnesota.

But Perez caused DOJ not to intervene as part of the deal to prevent the Supreme Court from deciding Magner. The fraud case against St. Paul was then dismissed on grounds that would not have applied had the U.S. been a party.

Score one for discrimination against low-income whites and one against the U.S. Treasury.

For Perez, these consequences (though probably not displeasing) were beside the point. Through his horse trading, he had protected a dubious legal theory that probably could not have withstood the scrutiny of the Supreme Court.

The deal Perez brokered raises significant legal and ethical questions, as well as serious questions about his fitness to serve in Obama’s cabinet. We expect to have more to say about the matter.

A letter from Reps. Smith, Issa, and McHenry and Sen. Grassley to Eric Holder about the quid pro quo can be found here.